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Tensions in financial markets have increased significantly since the populist/Eurosceptic Five Star/League in Italy took power in May and presented a budget in violation of EU rules. In an unprecedented move, the European Commission sent Rome back to the drawing board. Italy has now provided the Commission with its latest fiscal plan – which is not much different from the old plan. [more]

The workhorse framework of macroeconomics and monetary policy relies on the build-up of inflationary pressures across the cycle as the economy tightens, and firms have no choice but to raise wages, which ultimately lifts consumer prices. Within that narrative, the estimation of slack in the economy – the output gap – is crucial to monetary policy authorities. A positive output gap means that the economy is away from its long-term steady-state equilibrium, and unsustainable cost pressures are building up. Currently, the OECD / IMF / European Commission estimate of the output gap in the euro-area is slightly positive and reaching close to 1% by the end of next year. [more]

It may not feel like it, but we live in inflationary times relative to long-term history. Before the start of the twentieth century, prices crept higher only very slowly over time and were often flat for long periods. In the UK prices were broadly unchanged between 1800 and 1938. However, inflation moved higher everywhere across the globe at numerous points in the twentieth century. UK prices since 1938 are up by a multiple of 50 (+4885%). [more]

The constraints that forced a rapid slowing of euro area GDP growth momentum from 3% to 2% annualized in H1 — the pass through of earlier FX appreciation, the slowing of exports to China, the rise of the oil price — have eased or reversed somewhat, helping stabilize the economy through mid-year. Whether this can be maintained is a function of still-robust fundamentals (cyclical and structural drivers) vs. accumulating risk factors. [more]

The 15th September will mark ten years since Lehman Brothers filed for Chapter 11 bankruptcy protection, a cataclysmic event which reverberated throughout financial markets and led to the “Global Financial Crisis“. This laid the foundations for an extraordinary period for central bank activity and therefore financial markets. It’s still not clear if lessons from the GFC have been learned. In our 2017 Long Term Study “The Next Financial Crisis” we argued that the global financial system post Bretton Woods remains vulnerable to financial crises, and their frequency has been higher in this period than across all prior financial history. The GFC was clearly an extreme case and likely a once-in-a-lifetime event. However, in solving this crisis we have added more debt to an already heavily indebted system and our central banks have imposed a decade of extraordinary measures, from which most still struggle to withdraw. [more]

EM stress is still largely idiosyncratic, but the risk of a broader fallout is increasing. We have argued that external factors account for two-thirds to three-fourths of EM’s performance – especially for credit markets. The worsening of these external conditions is exposing the weakest links across EM and taking a disproportionate toll on several important economies. So far they are bearing the brunt of EM’s stress. [more]

It remains a macro world for credit, with no real concerns of a fundamental nature within the corporate bond universe. The problem is that the macro world has become increasingly complicated this year. At the start of 2018, when markets were extraordinarily becalmed, we did feel that 2018 would see the return of volatility and that credit spreads would widen in sympathy. The reality is that 2018 has certainly deviated from our roadmap even if spreads have migrated to roughly where we thought they would be at this stage of the year. [more]

In most ways, the US is equally as open to trade as other developed economies, but it is much more open to trade than most emerging market countries. In particular, China has many restrictions on trade. Compared with the US, China has higher tariffs and more non-tariff barriers to trade. [more]

The European Council meeting on June 28-29 is fraught with expectation of a breakthrough on EA reforms. However, while the aim of strengthening the resilience of the euro area is shared, means, scope and sequencing of action remain subject to debate. Also, it is open how the change of the political leadership in parts of the EA will affect the process. [more]

China ran a $376bn trade surplus against the US in 2017. US goods exports to China are worth only a quarter of US imports from China. However, these numbers do not capture the true size of US business interest in China. They are at odds with the fact, for example, that Chinese consumers own more active iPhones and buy more General Motor cars than US consumers do. These cars and phones are sold to China not through US exports, but through Chinese subsidiaries of US multinational enterprises. [more]